112.

ANNEXURE ON GUIDELINES ON FINANCING SOFTWARE INDUSTRY

Brief Background
1.1. The software industry in the country is showing an exponential growth. Further the potential for
these activities has been increasing, both within the country and abroad, in tandem with the
continuous growth in the I.T. Industry world-wide.

1.2. Software Development business has its peculiar characteristics like critical dependence on
manpower skills, rapid technological obsolescence, high manpower turnover, vast potential for
introducing new products, intense competition within the industry etc. The sector also offers
enormous scope for expansion and development. Software Development is one industry in
which our country is regarded as having potential to become global leader.

2. Bank‘s Policy
2.1. Recognising the potential for this industry, Reserve Bank of India and Indian Banks‘
Association have come out with the guidelines for financing this industry. Based on these
guidelines our Bank has formulated the policy for lending to computer software industry.
The salient features are as under:-

2.2. Terminology
2.2.1. I.T. Software means any representation of instructions, data, sound or image, including
Source Code and Object Code, recorded in a machine readable form, and capable of being
made use of by the client as per choice or providing interactivity to a user, by means of an
automatic data processing machine falling under the heading ―I.T.Products‖ but does not
include ―Non - I.T. Products‖
2.2.2. I.T. Service is any service which results from the use of any I.T. Software over a system of
I.T. Products for realizing value addition.
2.2.3. I.T Industry shall cover any development, production and services related to I.T. Products.
2.2.4. I.T. Product: would connote computer, digital / data communication and digital / data broad
casting products.

2.3. Segments of Software Industry and Their Requirements:

2.3.1.Software Services
2.3.1. (A) Staffing Services and Programming Services:
These services, which are also known as ―Manpower Exports‖, involve deputation of
professionals for delivering programming services at customer‘s locations within the country,
as well as abroad, under different contracts.

(B) The Working Capital requirements for these types of services would be in the form of
initial Travel Costs for order canvassing and mobilization expenses, as also travel cost and
living expenses of the personnel deputed for executing orders. The borrower may, in few
cases, receive some amount by way of advance payment from their clients which would be
mentioned in the contract. The contract would also indicate the mode of payment i.e. whether
by way of monthly / periodical payments or payment in lump sum after execution of the
contract. Thus, the working capital requirements of the borrower would, inter alia, depend
upon the gap in cash flows.

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2.3.2. Project Services
2.3.2. (A) Customised Software Development:
These services comprise providing solutions to specific problems of the customer which
would be utilized by corporate mainframe and mini computer users. These services could be
rendered either at customer‘s location or delivered on physical magnetic media like floppies
or through satellite communication networks. This service is normally offered under special
contracts which provide for milestone payments.
In these cases also, working capital requirements would be for meeting the gaps as disclosed
by the cash flow statements.

2.3.2 (B)Systems Solution and Integration:

This involves providing a complete business solution using information Technology. In this,
integrator addresses a business problem of the client and offers an I.T. based business
solution. The work involves Feasibility Study,System analysis, System Design,
Programming, Testing, Documenting customized software solution for clients and integration
of the programme with the client‘s existing I.T. system as well as with the systems of the
client‘s parties / associates. The working capital requirement would arise normally on account
of expenditure on professionals, purchase of software packages / tools.

2.3.2 (C) Maintenance of Software:

A complete responsibility for maintenance of the client‘s software is undertaken
which includes trouble shooting operations as well as updation of the software. Working
capital for this activity would be needed mainly for meeting expenditure on professionals.

2.3.3. Software Products and Packages:

2.3.3 (A) These services comprise of -
(i) Systems software i.e. Operating system Software, conversion of programmes
and utilities which enhance the computer‘s capabilities; and
(ii) Application Software which lets the computer perform specific functions,
packages like word processing, graphic design, financial analysis etc.

2.3.3. (B) These products are prepared to meet standard requirements of the end users and are sold
as packaged units comprising Software Manual and other user aids (tutorials).

2.3.3. (C) The development of these products involve fairly large scale investments, the
return on which can be realized only after the product is fully developed and sufficient
demand is generated therefore. By and large, no payment by the buyers would be
involved at any stage of the development and payments would be received by the
developer only on completion and purchase of the product by interested buyers. In such
cases, working capital requirements would be mainly towards salaries and expenses of
the professionals associated with the development of the product. The requirement for
development would vary and in some cases, may extend up to 24 months. As regards the
financing of this category, it would have to be funded as a Venture at considerable risk.

2.3.4. Information Technology related Services (I.T. Services)

2.3.4. (A) I.T. Services such as Call Centers, Mentoring, Teleconferencing, Tele Medicine etc. result
from the use of any I.T. Software over a system of I.T. Products for realising value
additions.

2.3.4. (B) Working capital requirements may also arise for meeting the expenditure
incurred in providing these services. However, these may not be of a
significant scale.
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3. Operational Guidelines for extending Working CapitalFinance
3.1. Eligibility
3.1.1. The units requiring assistance from the bank should have completed a minimum successful
running of three year.

3.1.2. However, in order to ensure that start up units is not denied financial assistance, the credit
requirement of these units may be considered on the following parameters:

a. Track record of promoters

b. Their group affiliation
c. Management team
d. Academic/professional qualifications
e. Work experience in software development, implementation, marketing etc.
f. In such cases, the constitution of the Venture should be as far as possible a limited
company.

3.2. Methodology for Assessment of Working Capital Requirements

3.2.1 Borrowers with credit limits up to Rs.2 crores may be assessed under Turnover Method.
Assessment of Permissible Bank Finance (PBF) has to be carried out on Cash Budget for
working capital limits of over Rs.2.00 crore.
The following documents from the borrowers are to be obtained:
i) Operating Statement - Form A
ii) Balance Sheet - Form B
iii) Cash Budget - Form C (Only in those cases where the working capital gaps are to
be financed on the basis of Cash Budget)
iv) Statement of Economics - Form D
v) Note on assumptions underlying the operating statement.

3.2.2. In addition to the above, every proposal for financial assistance must be accompanied by
Project Report and a Business Plan. The documents must clearly describe the short-term and
long-term goals of the unit / project, the strategies proposed to develop, implement and
market software, the stage-wise financial outlay and revenue / cost projections. In case of
Projects which are normally offered under special contracts which provide for ―mile stone‖
payments, the details of the same should also be mentioned in the Project Report. The basis
for seeking the proposed limits from the bank also needs to be clearly spelt out.

3.3. Nature of Credit Facilities

3.3.1. The credit facilities such as Cash Credit, Packing Credit, Overdraft, Bills Finance or Term
Loans as per the assessment and requirements of the borrower.
3.3.2. In case of limits over Rs.150.00 crore from the Banking System, the existing
guidelines of Loan System for Delivery of Bank Credit shall have to be complied with i.e.
Cash Credit Component shall be restricted to 40% of the aggregate credit limits sanctioned,
after excluding Export Credit Limits.

3.4. Margin
3.4.1. (A) Under Turnover Method: 5% of the Projected Turnover.
3.4.1. (B) Under Cash Budget Method: 25% of Current Assets.

3.5. Security
3.5.1. The process of development of Software does not generate tangible assets as in the case of
other manufacturing activities and the value of the end product depends upon its acceptability
to the user client. Further, the success of the activity depends upon the skills of the
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 Professionals / Promoters. As the working capital finance provided to this industry is clean in
nature for all practical purposes, it is proposed as under:

- 50% of the limits (FB & NFB) should be covered by collateral securities.
- We shall also explore the possibilities for assignment of Source Codes of the Software
Projects by the borrowers in favour of the Bank.

3.5.2. Relaxation in collateral securities:

Credit Approval Committees headed by delegatees not less than the rank of FGM/GM may
consider proposals within their delegated powers with a Collateral coverage between 25% to
50%. However proposals with less than 25% coverage may be considered at Central Office by
HLCC-ED and above depending upon the merit of the case. This is subject to the following
stipulations that:
a. Rating of the account should be minimum CBI-5 and External Rating ―BBB‖ &
above in case of advance above Rs.5.00 crore.
b. Key Financial Ratios should not be lower than the benchmark level or as permitted to
sanctioning authority in loan policy.
c. Operational dealings with our Bank / with other Banks should be satisfactory.

3.6. Rate of Interest

3.6.1. In case of Export Finance i.e. Pre-shipment and Post-shipment finance, as per the
guidelines of RBI.
3.6.2. In case of other types of advances, the rates should be in line with the general category
borrowers and as per guidelines on ROI issued from time to time.

3.7 Disbursement
3.7.1. The limits sanctioned either under Turnover Method or Cash Budget method depending upon
the requirements of the borrower, should be released in stages, taking into account the
monthly / quarterly cash gaps based on the Cash Flow Statements submitted by the borrowers
and after completion of post-sanction inspection of the units.
3.7.2. In case of units falling under Loan System for Delivery of Bank Credit, the guidelines issued
on the subject from time to time should be adhered to.
3.8. Sanction of Term Loans
3.8.1. The units sometimes may require Term Loans for acquisition of Fixed Assets, Computer
Systems etc. These units normally start up on small scale basis. Hence, the requirements of
Term Loans may be considered by the bank up to a maximum limit of Rs.3.00 crores to a
single borrower. However, sanctioning authorities at the level of ZLCC(GM) and above may
consider higher need based limits within the powers delegated to such authorities.
3.8.2. The appraisal of term loans shall be as per the procedure adopted for processing term loan
applications.
3.8.3. The security for the Term Loan will be first charge on the assets that are purchased / created
out of bank finance.
3.8.4. Disbursement of the loan will be in accordance with the requirements of the project as stated
in the Project Report and in stages.

3.9. Sanctioning Authority

3.9.1. ZLCC(GM) and above can consider the software proposals.

3.9.2. The sanctioning authorities should take in to account market report of the software company
and should consider the proposals on merits.

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3.9.3. The Credit Approval Committee headed by ZH-GM and above should ensure that the
advance is adequately secured by collateral security as mentioned in 3.5.1 and the overall
credit risk rating should be as mentioned in 3.5.2 above.

3.9.4. In case of proposals with credit risk rating below CBI-5, the same shall be dealt as per loan
policy guidelines. Looking to the potentials available at various centers for this type of
business, the following branches have been identified to handle such type of advances.

Name of the CentersBranch.

1. Mumbai Nariman Point.
2. Delhi Parliament Street.
3. Hyderabad Hyderabad Main Office
4. Chennai Chennai Main Office
5. Bangalore K.G.Road
6. Ahmedabad LalDarwaja, Ahmedabad
7. Pune Pune Camp Branch.

However, Zonal Managers may identify additional branches either in these centers or at other centers
depending upon the business potential and obtain approval of Central Office).

3.10 Periodical Reporting System

3.10.1. In case of assessment made under Cash Budget Method, Cash Flow Statements are to be
obtained from the borrowers once in a quarter so that mid-course corrections can be made in
respect of further Cash Budget.
3.10.2. In our Bank, Q.I.S.( system is in vogue. The borrowers under this category also shall submit
the same whether they are assessed under Turnover method or by Cash Budget Method.

3.11. Follow- Up
3.11.1. Considering the fact that financing Computer Software industry is a new area for
banks, it has been decided that we should adopt the existing system of follow up for advances
of Rs.3 crore and above. A copy of the format is enclosed herewith as Annexure – MC (I) and
the branches should submit the same i.e. Part A on monthly basis and Part B on half yearly
basis, in case of all the borrowal accounts irrespective of the limits sanctioned to them

4. General
4.1. Branches /Regional Offices/ Zonal Offices should not give appraisal note to any of the outside
agencies / borrowers. The request for appraisal note, if received from borrower / outside
agencies, should be forwarded to Central Office for their r approval. The approval for such
request may be considered by ED/ MD/ CEO.

4.2. No Company will be authorized to use our Bank‘s name as financing / appraising bank in any
of their documents for raising money from public / other institutions without the consent of
authorities at Central Office not below the rank of GM. Such authorizations may be granted
only at Central Office by CGM/G.M (Credit).

4.3. Any proposal for acting as Merchant Bankers to issues of Software companies for raising
funds from outside sources shall be cleared by sanctioning Authority HLCC – I & above
provided the project is appraised and financed by our bank.

Zonal Offices are advised to ensure that proper care and precautions are taken while assessing the
credit needs of the borrowers and also ensure that the need based credit support is extended to this
sector by our Bank.

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